The Reserve Bank of India on Friday announced the next leg of its liquidity-draining programme, scheduling a Rs 25,000 crore ($2.58 billion) open market sale of government bonds for Tuesday, October 13, and ordering banks to maintain 99 per cent of their daily cash reserve ratio from October 16.
The move signals that the central bank is pressing ahead with mopping up the large liquidity surplus sloshing through the banking system, even as markets brace for the impact on bond yields.
What the RBI announced
The Rs 250 billion sale will be conducted through a multiple-price auction on October 13. The securities on offer mature between 2030 and 2035, including the 7.88% 2030, 6.10% 2031, 7.95% 2032, 7.26% 2033, 7.18% 2033 and 7.10% 2034 notes, according to Reuters.
Separately, the regulator tightened daily maintenance of the cash reserve ratio: banks must now maintain 99 per cent of the daily CRR from October 16, against 90 per cent earlier. Banks park 3 per cent of their deposits with the RBI under CRR and earn no income on these funds.
A hardening policy stance
The announcement comes days after the RBI raised its key policy rate for the first time in nearly four years and signalled that more rate hikes could follow. The central bank did not announce any liquidity-draining measures in the policy itself. Governor Sanjay Malhotra said the surge in liquidity would not be a long-term phenomenon and that a large amount of it would get absorbed within the financial year ending in March.
The September experience showed how aggressively the RBI is prepared to act: last month it conducted open market sales worth Rs 1 lakh crore across three tranches — Rs 50,000 crore on September 17 and Rs 25,000 crore each on September 21 and 28 — the highest net sale in over a decade. Banks submitted bids exceeding the notified amounts in all three auctions, indicating substantial demand for the securities.
Market implications
India's banking system liquidity surplus has averaged more than Rs 7 trillion ($72.37 billion) on a daily basis since September 1, amounting to 2.6 per cent of deposits. ICICI Securities Primary Dealership said in a note that markets should be prepared for the surplus to fall below 1 per cent of deposits, potentially landing in the 0–0.5 per cent range in the coming quarters. The primary dealer noted that OMO sales have led to a "bear flattening" of the yield curve. Reports suggest bond yields could open 4–5 basis points higher on Monday following the announcement.
Sources:
Reuters: India central bank to sell $2.6 bln of bonds
Business Today: RBI schedules Rs 25,000 crore bond sale for October 13
The move signals that the central bank is pressing ahead with mopping up the large liquidity surplus sloshing through the banking system, even as markets brace for the impact on bond yields.
What the RBI announced
The Rs 250 billion sale will be conducted through a multiple-price auction on October 13. The securities on offer mature between 2030 and 2035, including the 7.88% 2030, 6.10% 2031, 7.95% 2032, 7.26% 2033, 7.18% 2033 and 7.10% 2034 notes, according to Reuters.
Separately, the regulator tightened daily maintenance of the cash reserve ratio: banks must now maintain 99 per cent of the daily CRR from October 16, against 90 per cent earlier. Banks park 3 per cent of their deposits with the RBI under CRR and earn no income on these funds.
A hardening policy stance
The announcement comes days after the RBI raised its key policy rate for the first time in nearly four years and signalled that more rate hikes could follow. The central bank did not announce any liquidity-draining measures in the policy itself. Governor Sanjay Malhotra said the surge in liquidity would not be a long-term phenomenon and that a large amount of it would get absorbed within the financial year ending in March.
The September experience showed how aggressively the RBI is prepared to act: last month it conducted open market sales worth Rs 1 lakh crore across three tranches — Rs 50,000 crore on September 17 and Rs 25,000 crore each on September 21 and 28 — the highest net sale in over a decade. Banks submitted bids exceeding the notified amounts in all three auctions, indicating substantial demand for the securities.
Market implications
India's banking system liquidity surplus has averaged more than Rs 7 trillion ($72.37 billion) on a daily basis since September 1, amounting to 2.6 per cent of deposits. ICICI Securities Primary Dealership said in a note that markets should be prepared for the surplus to fall below 1 per cent of deposits, potentially landing in the 0–0.5 per cent range in the coming quarters. The primary dealer noted that OMO sales have led to a "bear flattening" of the yield curve. Reports suggest bond yields could open 4–5 basis points higher on Monday following the announcement.
Sources:
Reuters: India central bank to sell $2.6 bln of bonds
Business Today: RBI schedules Rs 25,000 crore bond sale for October 13
